Williamson v. Murray (In re Murray)

• Decision Date: 04 March 2014
• Docket Number: KS–13–037.,Bankruptcy Nos. 12–41579,BAP Nos. KS–13–034,12–40906.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Tenth Circuit
• Parties: In re Connie Rae MURRAY, Debtor. Darcy D. Williamson, Trustee, Appellant, v. Connie Rae Murray, Appellee, and Derek Schmidt, Kansas Attorney General, Intervenor–Appellee. National Association of Consumer Bankruptcy Attorneys, Amicus Curiae. In re Courtney Jane Beach, formerly known as Courtney Jane Keith, and John Edward Beach, Debtors. Robert L. Baer, Chapter 7 Trustee, Appellant, v. Courtney Jane Beach, formerly known as Courtney Jane Keith, and John Edward Beach, Appellees.

506 B.R. 129

In re Connie Rae MURRAY, Debtor.

Darcy D. Williamson, Trustee, Appellant,

v.Connie Rae Murray, Appellee,andDerek Schmidt, Kansas Attorney General, Intervenor–Appellee.

National Association of Consumer Bankruptcy Attorneys, Amicus Curiae.

In re Courtney Jane Beach, formerly known as Courtney Jane Keith, and John Edward Beach, Debtors.

Robert L. Baer, Chapter 7 Trustee, Appellant,

v.Courtney Jane Beach, formerly known as Courtney Jane Keith, and John Edward Beach, Appellees.

BAP Nos. KS–13–034, KS–13–037.

Bankruptcy Nos. 12–41579, 12–40906.

United States Bankruptcy Appellate Panel of the Tenth Circuit.

Filed March 4, 2014.

Shawn C. Jurgensen (Darcy D. Williamson, pro se, with him on the brief) of the Williamson Law Office, Topeka, KS, for Appellant Darcy D. Williamson, Trustee.

David P. Troup of Weary Davis, L.C., Junction City, Kansas (Jill A. Michaux of Neis & Michaux, P.A., Topeka, KS, with him on the brief), for Appellee Connie Rae Murray.

Derenda J. Mitchell, Assistant Attorney General, for Intervenor–Appellee Derek Schmidt, Kansas Attorney General.

John T. Houston of Cosgrove, Webb & Oman, Topeka, KS, for Appellant Robert L. Baer, Chapter 7 Trustee.

Bruce C. Barry of Bruce C. Barry, P.A., Manhattan, KS (Jill A. Michaux of Neis & Michaux, P.A., Topeka, KS, with him on the brief), for Appellees Courtney Jane Beach and John Edward Beach.

Before THURMAN, Chief Judge, CORNISH, and MOSIER ¹, Bankruptcy Judges.

OPINION

CORNISH, Bankruptcy Judge.

In these two substantively similar cases, the Chapter 7 trustees appeal the bankruptcy court's orders overruling their objections to exemptions claimed by the debtors. The debtors claimed as exempt their state and federal tax refunds attributable to the earned income tax credit under a Kansas bankruptcy-only exemption statute. The trustees objected, arguing primarily that their statutory strong-arm rights and powers defeated the debtors' exemptions. The bankruptcy court overruled the objections, concluding that the trustees' strong-arm rights and powers apply to property of the estate, but do not extend to specifically exempt property. Having reviewed the record and the applicable law, we AFFIRM the bankruptcy court's orders.

I. FACTS AND BANKRUPTCY COURT PROCEEDINGS²A. Murray Facts

Debtor Connie Rae Murray (“Murray”) filed a voluntary Chapter 7 petition in October 2012, claiming as exempt on Schedule C her “2012 Federal and State Refunds” with a value of $4,400. Murray claimed the exemption pursuant to Kansas Statutes Annotated (“K.S.A.”) § 60–2315, which was enacted in 2011 and permits an individual debtor in bankruptcy to exempt the federal and Kansas earned income tax credits (“EITC”) for one tax year. Darcy D. Williamson (“Williamson”), the Chapter 7 trustee, timely objected to the exemption claimed by Murray. Williamson argued that: 1) the exemption can be defeated by the strong-arm powers granted her under 11 U.S.C. § 544(a)(2); ³ 2) the exemption violates the Uniformity and Supremacy Clauses of the United States Constitution because it benefits only bankruptcy debtors; and 3) the exemption impermissibly alters the way in which payments are made under § 507, the provision setting forth the priority order of a bankruptcy estate's expenses and claims.

Williamson's second and third arguments had previously been considered and rejected by the bankruptcy court in a written decision issued April 4, 2012, in another case.⁴ To support her only new argument, i.e., that her § 544(a)(2) powers can defeat Murray's claimed exemption, Williamson relied primarily on In re Duffin, a 2011 decision of this Courts.⁵ Generally speaking, Duffin addressed the scope of a trustee's § 544(a)(2) powers in reference to a Utah exemption for life insurance policies that excluded from exemption the premium payments made by the debtor in the year preceding a creditor's execution or levy.⁶

The bankruptcy court placed Williamson's objection under advisement based on ripeness concerns because the exemption was “of a tax refund that was neither certain to occur nor certain in amount.” ⁷ Murray subsequently received a Kansas EITC refund of $410, and at the time of the bankruptcy court's decision, anticipated a federal EITC refund of $2,276. The National Association of Consumer Bankruptcy Attorneys filed an amicus curiae brief in support of Murray, and Kansas Attorney General Derek Schmidt filed a memorandum in opposition to Williamson's objection and in defense of the constitutionality of K.S.A. § 60–2315.⁸

B. Beach Facts

John and Courtney Beach (the “Beaches”) filed a voluntary Chapter 7 petition in June 2013, claiming as exempt on Schedule C their “Earned Income Credit” for tax year 2012 with a current value of “Unknown” pursuant to K.S.A. § 60–2315. Robert L. Baer (“Baer”), the Chapter 7 trustee, timely objected to the exemption claimed by the Beaches. Like Williamson, Baer argued that his § 544(a)(2) powers can defeat the exemption, relying on the Duffin decision to support his argument. However, Baer did not allege that the bankruptcy-only exemption is unconstitutional, or that it impermissibly reprioritizes payment of claims under § 507.

As with the Murray case, the bankruptcy court held Baer's objection under advisement due to concerns regarding ripeness.⁹ The Beaches subsequently received a federal EITC refund of $2,078, and a Kansas EITC refund of $375. Because this case was similar to the Murray case, the bankruptcy court administratively joined the cases and designated Murray as the lead case.

C. Bankruptcy Court Rulings

On April 29, 2013, Judge Janice Miller Karlin issued a Memorandum Opinion in each case, overruling the objections by Williamson and Baer (collectively, the “Trustees”), and allowing Murray and the Beaches (collectively the “Debtors”) to exempt their federal and Kansas EITC refunds. As to Williamson's assertions that the Kansas bankruptcy-only EITC exemption is unconstitutional and impermissibly reprioritizes payment of claims under § 507, Judge Karlin first noted that it had previously held those arguments to be invalid in In re Westby, and further, that this Court upheld such decision on appeal by opinion issued February 4, 2013.¹⁰ Additionally, Judge Karlin pointed out that the same arguments had similarly been rejected by Judge Robert E. Nugent of the Kansas bankruptcy court in In re Earned Income Tax Credit Exemption Constitutional Challenge Cases (“ In re EITC Cases ”)¹¹ that was the subject of an appeal pending before Judge Thomas Marten of the United States District Court for the District of Kansas at the time of her decision. ¹²

With respect to the Trustees' argument that their § 544(a)(2) strong-arm powers can defeat the Debtors' exemptions, Judge Karlin distinguished this Court's Duffin decision on the basis that it involved non-exempt property and concluded that the Trustees' § 544(a)(2) rights do not extend to exempt property that is not available for distribution to creditors as property of the estate.¹³ The Trustees timely filed notices appealing the bankruptcy court's orders to this Court. Also pending before this Court is Murray's Motion for Debtor's Attorney's Fees and Costs (“Motion for Fees”).¹⁴

II. APPELLATE JURISDICTION

This Court has jurisdiction to hear timely filed appeals from “final judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal. ¹⁵ Neither party elected to have this appeal heard by the United States District Court for the District of Kansas. The parties have therefore consented to appellate review by this Court.

A decision is considered final “if it ‘ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.’ ” ¹⁶ An order disposing of an objection to a creditor's claim is a final order for the purposes of appeal.¹⁷

III. STANDARD OF REVIEW

The basic facts of these cases are undisputed. On appeal, the Trustees assert the bankruptcy court erred in determining the Debtors' claimed exemptions for tax refunds attributable to the federal and Kansas EITCs cannot be defeated by their § 544(a)(2) strong-arm powers. The Trustees' assertion of error presents a legal issue for determination. Legal questions are reviewed de novo.¹⁸De novo review requires an independent determination of the issues, giving no special weight to the bankruptcy court's decision.¹⁹ Additionally, Kansas law provides that exemption statutes are to be liberally construed in favor of those benefitted by them.²⁰

IV. ANALYSISA. EITC and Kansas Exemption Background

1. Federal and Kansas EITCs

First enacted in 1975, the original purposeof the federal EITC ²¹ was to offset the burden on lower income earners of payroll deductions for social security and Medicare.²² After numerous expansions, the EITC is regarded by many as the largest federal anti-poverty program in the United States.²³ Because it can be perceived as “work-based welfare,” or an “income support program,” the EITC ordinarily enjoys broad-based bipartisan support from politicians, scholars, and pundits alike. ²⁴ The EITC can also be viewed as a cash transfer program in that it is a refundable credit—in other words, it can decrease tax liability below zero and cause a payment to the taxpayer.²⁵ The amount of a taxpayer's EITC is calculated pursuant to a rather complicated formula ²⁶ and is based on a percentage of his or her earned income,²⁷ taking into account the number of qualifying children the taxpayer can claim.²⁸

In the late 1980's and early 1990's, states began enacting their own versions of the EITC to complement the federal EITC. Most state EITCs are calculated as a percentage of a taxpayer's federal EITC.²⁹ Kansas enacted an EITC provision in 1998, and expanded it in 2002, 2007, and 2010.³⁰ The amount of the Kansas EITC was originally 10% of the federal EITC, but was increased to 18% for 2010 through 2012.³¹

2. Kansas Exemption of the EITC

The Bankruptcy...